Investment Lingo: All the Money Terms You Need to Know and What They Mean
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Buying shares can feel overwhelming when you are a beginner, but the truth is that shopping for shares is ultimately no different than shopping for clothes. Women often think that we don’t make good investors and that this is something best left to men or finance experts, but nothing can be further from the truth. If anything, analysis is our superpower (just think of all the decisions we make when it comes to deciding what to wear!) and it is just what we need to be successful investors.
With that in mind, let’s use a fashion analogy to work through some key investment terms, and in doing so turn the unfamiliar into the familiar.
The first concepts you need to be familiar with are asset classes. An asset class is essentially a group of investments that share similar traits or behave in a similar manner. In fashion terms, think of it as your jackets, pants, blouses, dresses or accessories. Each group serves its own purpose.
The main asset classes are:
- Cash (for example, putting money in an online savings account),
- Property (this can be further grouped into residential, commercial and industrial),
- Shares (also known as equities or stocks, these can be further divided into Australian and international shares),
- Fixed income (such as government and corporate bonds).
Once we know what clothing options (aka asset classes) are on the market, the next decision is how to bring them all together. In investment terms, we call this your risk profile — in fashion terms you can think of it as your fashion style. Are you a risk-taker when it comes to your wardrobe or do you prefer to dress more conservatively? Do you prefer to only wear dresses or are you a pantsuit kind of girl? In investment terms, here are some questions to help you determine your risk profile:
- What is your experience in investing? If you are just starting out, then you probably want to steer clear of complicated investments such as futures, options and hedge funds, and focus on something simpler to start with, like an index fund.
- What is your investment time frame? How soon you need to access your money will determine what portion of your savings you can afford to invest in something like shares or property.
- How much money do you want to invest? Some investments have minimum investment amounts, so the amount you are looking to invest may narrow down your options.
- How much volatility can you stomach? For example, how would you respond if your investment dropped in value by twenty per cent? Would you panic and sell straightaway, hold on and ride out the storm, or see it as an opportunity to invest more? In other words, what is your psychology around that particular investment and investing in general? Your appetite for risk will determine which investment options are suitable for you.
Returning to the fashion analogy, how much money you spend on each clothing item will depend on your fashion profile, so to speak. The process of deciding which pieces you want to buy (asset allocation) and how much to spend on each (your risk profile) is referred to as portfolio construction.
Minimise Your Risk
Regardless of your risk appetite (or fashion style) its always a good idea to do what you can to minimise risk and keep your options open. This usually involves using a combination of the following two strategies:
- Diversification: this just means having several different investments. Don’t just buy pants and all in the same style, buy a few different items, colours and styles instead.
- Dollar cost averaging: In an ideal world, you want to buy low and sell high, but only hindsight will accurately tell you when that time was (even the experts can’t always get this right). So, rather than getting paralysed by fear of making the wrong call, the principle of dollar-cost averaging says that you should just invest regularly and, overall, this will even out. Sometimes you’ll pay full price, other times you’ll grab a bargain!
Closely related to your risk profile is your investment style. In other words, do you prefer a low-maintenance wardrobe where you aren’t constantly updating your look? Or are you happy to keep a regular eye on investment trends and be one of the early adopters of newly emerging opportunities?
In investment terms, these are known as “passive” and “active” investing. Passive investors will buy and hold classic pieces while active investors will regularly research the market and try to find the best opportunities to buy and sell.
A solution could be to do a bit of both, also known as the core-satellite approach. This means putting passive investments, such as index funds, at the heart of your portfolio, so you know that, at the very least, your investments will be performing in line with what the markets are doing. You can also have some of your money invested in other carefully researched and selected investments that you believe may deliver higher returns than the market index.
Think of it as having your capsule wardrobe (index funds) with some essential, timeless pieces, and then buying and selling other fashion pieces (satellite investments) whenever you come across a good opportunity.
Now that you know which pieces you want to buy, and how much you are willing to invest in each, it’s time to go shopping — starting with putting together your capsule wardrobe (aka core investments). When you buy clothes, you typically have a few options regarding where to buy them from. You could opt for a designer label, you could shop at a department store, or you could choose a small boutique or retail chain. While they all essentially offer clothes (or access to a market index), they tend to go about their business in a slightly different way.
In a similar way, you can invest in a market index through a listed investment company (LIC), an exchange-traded fund (ETF) or a retail managed fund. From a purely share price or minimum investment perspective, you could think of them in this way:
Despite the analogy used here, when you are comparing investment options, it is important that you don’t just go by share price or minimum investment amount. Make sure you understand how that investment company or managed fund is going to invest your money and how this fits in with your goals and preferences.
While investing can feel overwhelming due to the number of options and information available, it doesn’t need to be so. Just as we have become accustomed to perusing the endless number of clothing options for that next special event, so too can shopping for shares become second nature.
All it takes is a little bit of practice and changing the way we think about investing.
Natasha Janssens is a Certified Money Coach (CMC)® and founder of Women with Cents. She is an award winning financial educator with a passion for supporting women to transform their relationship with money. If you don’t know what you don’t know when it comes to money and financial matters, her book Wonder Woman’s Guide to Money is for you. For more of Natasha’s tips follow her on Instagram and take the Money Type Quiz.